Do I qualify for any tax benefits?

Question

Hello BP members. As the year comes to an end I’m happy to say I am 95% done with my first BRRRR deal. It is an out of state duplex.

I always hear people say that buying real estate can help decrease your taxes. Currently I only have this 1 property, however I’d like to save money on my taxes if possible. If I only own this 1 property is there any tax right offs or anything I should be aware of that might help me pay less? Any help is appreciated, thank you all and Happy New Year!

Nicholas Coulter · Answer

@Miguel Hernandez I have a great CPA if you need a recommendation! I would always defer to a professional through this.

Basit Siddiqi · Answer

BRRRR is Buy, Rehab, Rent, Refinance, Repeat.If your property was purchased as a total rehab and you took all of 2022 rehabbing the property, the property may potentially be considered 'not in service yet'Talk to your CPA.

Dave Foster · Answer

@Miguel Hernandez, It's time for your accountant to do their magic.  Depending on when you "place the property into service" you'll get the depreciation benefit that @Chris Seveney was talking about.  If you're in service date is 2022. you'll see a benefit on 2022 taxes.

The money you have spent working on the place is going to be in one of two buckets - operating expenses (usually smaller repairs that simply keep the property at it's current level of fitness), and Capitalized expenses (usually larger items that improve the properties value).

The small expenses can be deducted in the current year.  So that benefits you directly.  The larger expenses add to your basis in the property which gives you additional depreciation.  Both are benefits.  The latter impacts you more quickly.

Don't forget that all interest you've paid will be a write off.  And you'll get positive tax treatment for the cost of your financing.

Chris is right - the depreciation is only deferred.  But now that you've started all you need do is complete a 1031 exchange whenever you sell a property and you'll continue to defer indefinitely.

And at the end of the ride your heirs get your properties tax free.  So yes, tax free forever is possible.  you're on the way.  Good luck with your refi and next purchase.

Chris Seveney · Answer

@Miguel Hernandez

I would speak to your cpa but also want to clarify that real estate let’s you “defer” taxes but not lower them

A classic example is depreciation which you can reduce your tax liability each year by depreciating the property but for tax purposes this lowers your tax basis so when you sell you are then paying those deferred taxes

It helps because you can invest those funds etc or do a 1031 exchange and continue to defer the taxes but eventually you will have to pay.

Just wanted to clarify that.